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Obama may choose to speak softly on currency issues

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When Leo Gerard starts praising Ronald Reagan, you know the world is changing.

Gerard, the United Steelworkers union president best known for his tough support of workers' rights, and Reagan, the darling of the Republican right, would normally make unlikely bedfellows. But on one issue—the need to defend the U.S. economy from the impact of an undervalued foreign currency—Gerard seems to have more in common with Reagan than with the current President.

It was Reagan who took action in 1985 to depreciate the dollar vs. the Japanese yen—or, as Gerard put it at a recent conference, "called (Japan) in and said it was unacceptable" for them to continue to maintain the yen at an artificially weak level, so boosting their exports and swelling the U.S. current account deficit. The resulting deal, most economists agree, helped pull the U.S. economy out of recession.

Gerard, and many others in the steel and manufacturing industries, would like to see Obama take a leaf out of the Gipper's book. The villain now is China, not Japan, and the problem is of a hugely different scale. Japan was running a trade surplus with the U.S. of just over $50 billion in 1985; last year alone, in a recession, the U.S. trade deficit with China was more than $226 billion.

Domestic manufacturing groups have been trying for some time to draw attention to the consequences of this trade imbalance: the lost jobs, the industries that have migrated to China. In recent months, as unemployment rose to around 10 percent, the issue has gained ground in Congress, notably with the revival of legislation that would put a tariff on Chinese imports. In April, the Treasury Department will have another opportunity to label China a "currency manipulator," which would indicate that Obama believes China's undervalued currency is becoming a real problem.

Ironically, China's leaders might well agree. Despite seemingly tougher rhetoric in China against what top government officials there describe as "protectionist" calls for a revaluation of the yuan, there is clearly a growing realization that strengthening the currency would be one of the most effective ways of slowing the country's economy, which some fear is overheating.

China's exporters make up a sizeable chunk of gross domestic product and undoubtedly have been lobbying hard against a revaluation. But after pouring $1.4 trillion of credit into the economy last year, Beijing is looking for a way to apply the brakes; if there's one thing guaranteed to give China's leaders worse nightmares than upsetting exporters, it's the prospect of out-of-control inflation causing discontent among its billion-plus population.

So Beijing may well be reaching a conclusion similar to U.S. manufacturers: that a revaluation is in its best interest. The chances of China making a one-off appreciation of 25 to 40 percent, the amount some economists say is justified, is zero, but a 5- to 10-percent rise looks possible.

But whether turning up the heat on China is the best way of guaranteeing that outcome is another matter. China's leaders don't like to be pushed around in public, and it can be argued that the more vocal the calls for change from the United States, the less room it gives China's leaders to maneuver. That school of thought may well appeal to Obama, who by temperament and conviction appears to take a very different approach to world affairs than, say, Reagan. "Currency manipulator" doesn't quite have the ring of Reagan's famous "Evil Empire," but don't be surprised if Obama backs off from using even the less inflammatory of the two phrases.

An unspoken deal not to push China into a corner in return for an appreciation of the yuan—albeit smaller than many want—may be the likeliest outcome over the next few months. Whether that will prove to be enough for U.S. manufacturing and steel is doubtful, but that may be all that's on offer.

MANAGING EDITOR

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